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Understanding Mortgages: What is a Short Sale?

(7/11/2012) In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.

With the new real estate reality in the last few years, “short sale” has become an inescapable term. When a mortgage company wants to avoid foreclosure, they may accept less than the full value of the home in a sale. This short sale helps them get rid of a defaulted loan before resorting to foreclosure.

While short sales have become more popular in the midst of a troubled real estate market, it’s actually a potentially beneficial phenomenon. Some analysts call short sales one of the only win-win situations existing, benefiting both lenders and borrowers.

Mortgage companies consider short sales more attractive alternatives to foreclosure. Instead of a long drawn out process of taking ownership of the property, which may then stay vacant and unprofitable for months or years, companies can cut their losses early on.

Borrowers who currently own the home benefit from short sales for some of the same reasons. They can prevent foreclosure and all the credit-killing associations with it, and get out of a situation where they can’t afford their mortgage.

Borrowers who are looking to buy also benefit - they can obtain a property for a bargain price. Lenders typically slash prices on their short sale properties, since getting some money is better than no money.

Overall, short sales can provide a boost for most of the players in the housing market by providing an incentive for additional sales and preventing some of the damage of foreclosure.

In the past, one of the major drawbacks of short sales was added tax liability. When lenders forgive a borrower’s debt, which is technically what occurs when lenders opt for short sale or foreclosure, the debt was actually considered income. Any amount forgiven over $600 had to be claimed on tax returns, which could be a major drain on borrowers.

The Mortgage Debt Forgiveness Relief Act of 2007 ended this tax law for borrowers doing a short sale on their primary residence. In addition, new IRS laws allow certain borrowers with investment properties to reduce or eliminate their tax liability.

The information contained on this website is provided as a supplemental educational resource. Readers having legal or tax questions are urged to obtain advice from their professional legal or tax advisors. While the aforementioned information has been collected from a variety of sources deemed reliable, it is not guaranteed and should be independently verified. ERATE does not endorse any of the lenders on our website.